Max Stock Ltd

Good morning and good afternoon, everyone, and thank you for joining us today. With me on the call is Nir Dagan, our Deputy CEO and Head of Finance. And I will cover the first part of the presentation, and Nir will be presenting the highlights of our fourth quarter and as well as a deeper dive on our financials later on during this presentation. Before we start, and as always, as a reminder, there is a presentation accompanying today's prepared remarks, and the slides are available on our IR website at ir.maxtalk.co.il. And on slide number two, as you know, this is our standard disclaimer language. I think everyone is familiar with it. So, guys, I believe that everyone that joined is familiar with Maxtalk and our position in the marketplace, being Israel's leading extreme value retailer and offering a broad assortment of quality products at affordable prices. On the next slide, an update, we have 58 branches in Israel with approximately 2,000 employees. We provide a mix of private and max-labeled products, affordable prices across six core categories. You know that figure. Nearly two-thirds of our sales are generated from non-discretionary everyday needs. That creates really a very stable demand for our products. And this is a new figure. Seventy percent of our revenue is coming from products priced at sales. 10 shekels or less so the equivalent of three dollars and below and you know all of these attributes make us really well positioned to succeed also in challenging economic environments On the next slide, slide number five, we've established our leading market position in Israel through several competitive advantages, including our strong brand that has grown primarily through word of mouth. And I'll give you an update on our more recent marketing efforts. Obviously, our everyday low prices on a broad assortment of quality products and our very unique treasure hunt experience in our stores, these attributes allow us to attract high-quality traffic made up of different demographics and income ranges and allowing us to benefit from favorable leasing terms This also is a driver behind us being or having the highest sales per square meter globally, as far as we know, and as compared to our publicly traded peers. So Nir, we'll now review the highlights of our fourth quarter. Nir, please.

Thanks, Talia. Slide six. So before moving into the highlights of our fourth quarter, I want to describe a shift in the timing of the Jewish holiday in 2022 compared to last year. This shift in days that our stores were closed resulted in a 5% decrease in selling days in the fourth quarter this year, which weighed on the fourth quarter sales growth. Accounting for this shift by comparing the combined third and fourth quarter, we saw comparable store sale expanded more than 1% over the six months period in over a year ago. Slide seven, turning now our fourth quarter highlights on slide seven, revenue expanded 2.7% compared to the fourth quarter of 2021. Even with this timing shift of the Jewish New Year holiday into the third quarter I just described. Gross margins were particularly strong, up 230 basis points this quarter, driven by a decline in shipping prices and more inventory headwinds. This factor together led to a double-digit gain in both adjusted net income and adjusted EPS this quarter, up 10.7% and 13.1% respectively. Next is a look at our liquidity and capital diplomacy strategy. Our net cash position of 33 million at year end ensures financial flexibility for the foreseeable future. Due to our modest capital expenditure and working capital needs, we've been actively returning value-to-share orders through annual dividend and our share buyback program since 2017. And including the dividend, we had just announced and shared buyback that we had To date, we've returned about $309 million to shareholders. Our leverage pro forma for the announced dividend is still very low at 0.2 net debt to 2022 EBITDA. Now I will turn the call back to Talia.

Thank you, Nir. Turning to slide number nine. As in past year, we also saw top-line expansion across all of our core categories this year, too. We were particularly pleased to see very strong double-digit growth in three of our six largest categories in consumables, office and school supplies, and in arts and crafts. On the next slide, slide number 10, as we've grown over nearly two decades, so has our addressable market. We've expanded our customer base within Israel through continued diversification of products and the addition of more than 25 new categories, such as pet supplies, electronics, confectionery, outdoor. These additional categories are still nascent for us and can grow significantly while broadening the concept's appeal and further contributing to our impressive historical same-store sales growth and increasing our average basket size. On the next slide, slide number 11, one of our main differentiators is that every month about 40% of our SKUs rotate, and we introduce thousands, thousands of new items for the holidays as well as for new seasonal favorites to meet our customers' changing demand. And these items are featured only for a short period of time. which creates our known, exciting treasure hunt experience. On the next slide, slide number 12, our proven strategy that has led to such exceptional results is driven, first of all, by exceptional individuals across our organization. This includes a passionate founder-led management team that has over 100 years of combined retail experience, along with a tremendous group of store managers and associates that are fully committed to delighting our customers through an immersive, highly enjoyable shopping experience. On the next slide, slide number 13, this year we've issued our first comprehensive ESG report, and this is a significant milestone in our effort to quantify and demonstrate our broader impact We will soon have an English version of the report available on our investor relations website. We are very proud of our efforts and encourage you to utilize our report to better understand our ongoing efforts around ESG. Next, slide number 14 is a look at our strategies and opportunities that will drive growth over the near and long term. So slide 15 is a reminder of our dual format store strategy for both suburbans and urban markets. So we have Max, our big box format that is typically company owned, is our main format of top line expansion. But we also see plenty of growth in our mini max or small box format that is typically franchised and is inner city format. On the next slide, we show it every quarter, and you can track our progress towards our goal. We expect that by 2025, we will double our square meters of our owned stores, so that doesn't capture our franchised operations. in Israel as compared to our year-end 2019 figure of approximately 40,000 square meters. Now, today, we are approximately at 61,000 square meters, an expansion of 50 percent from our standing point. And with the current pipeline that we will share with you, we are about 70,000 square meters. Just translating, this additional 9,000 square meter is additional $135 million in run rate revenue, assuming a very, very conservative assumption that sales per square meter will be at 15,000. We are currently at 18%. Turning now to slide number 17, last December we opened a new franchise store in Jerusalem, in one of Jerusalem's neighborhoods called Romema. And on slide number 18, you can also see a store that we just recently, a few days ago, two weeks ago approximately, opened. The location is this city. It's the industrial park of Maledwim. And it is addressing a population of almost 40,000 people. The net size of this store is about 1,500 square meters. On slide number 19, another new store. This is going to be open tomorrow. The store is approximately 1,000 net square meters and is expected to have or to serve an addressable population of more than 70,000 people. On page 20, we provided you a full outlook of our pipeline over the next three years, and we expect to open an additional six stores with a total of approximately 16.6 thousand gross square meters, along with three new franchise locations that will be open this year in 2023. We plan to add two of these six owned locations this year in addition to the two stores that I just alluded to, totaling additional 5,200 gross square meters. On the next slide, slide number 21, as I mentioned before, some color on our efforts around marketing. You know, historically, we've never done any material marketing or brand awareness work. It was all through organic, unpaid growth, and it was all driven by word of mouth. In 2022, we launched our first TV campaign during the back-to-school period. And this year, in the first quarter, we had a second TV campaign during Purim, which is the equivalent of Halloween. Both these campaigns had very positive results. In addition, if you look at our online social presence, and I really encourage you to visit our Instagram page and our Facebook page, and also to check our LinkedIn account in which we provide a lot of content that is tailored for investors. You can see the growth that we've experienced, so congratulations. Facebook, our Facebook page, since 2018, we've seen over 50% increase in our following. Our Instagram following increased more than five times. And we also launched recently a loyalty program that has gained more than 100,000 members. In fact, this is a figure that is as of December 2022. And as of today, we've already passed 120,000 members. So we really look forward to continued expansion of this program and our marketing efforts to continue to build a passionate and repeat customer base. And all of this effort at the end of the day are translating into increased traffic in our stores and increased basket size that eventually translate into same-store sales growth. Next, page 22, this is a brief update on the Portugal expansion plan. In the fourth quarter, on the next page, page 23, we established a joint venture called Max10. We recruited a local management team in Portugal to lead our store expansion efforts. We have a team of retail experts, local retail experts there. And also we've recruited the staff that is required for our first store. As we mentioned in the past, our plan is to have our first two stores established this year. So one will be open in Braga. It is approximately 2,200 square meters. And one is in Porto, approximately 700 square meters. And both are expected to be open in the second half of this year. Next, on slide 24, this is just to give you a sense of the look and feel of our Max 10 concept. We are very excited about our first expansion beyond Israel, and we look forward to updating you with further progress this year. So, I'll provide some additional thoughts on our long-term metric progress, but Nir will now go through the full year 2022 numbers. Nir, go ahead.

Thanks, Talia. Slide 26. Looking at the long-term trend of the four-quarter result on the slide, total revenue was up 40.3% when compared to pre-pandemic fourth quarter of 2019. We also saw Gross profit expanded by 44.9% and adjusted EBITDA, which excluded the impact of IFRS 16, and stock-based compensation was up 64.3% from the pre-pandemic period. Adjusted EPS share was 0.14 shekel and increased on 60.9% when compared to the first quarter of 2019. On slide 27, turning now to highlights of the full year, We are pleased to have delivered a solid year-over-year result, even with a difficult comparison to 2021, which benefited from lingering pandemic tailwinds. Revenue grew 7.4% top over one billion for the first time in the history of the company driven by additional of two new own stores and 3.2% increased in average basket size. While sales were done modestly versus 2021, they were up 19% compared to pre-pandemic 2019. Our recent top-line performance underscores our strong and growing position as Israel's leading extreme value retailer. We also saw strong gross margin expansion of 100 basis points along with operating cash flow that far exceeded those of 2021. And we adaptively managed our inventory level down to pre-pandemic level. While we were very successful in many areas, higher than anticipated SG&A cost pressure EBITDA margin and DPS growth this year. Even so, we continue reward shareholder with highly yield of 13% comparison of both dividend and share buyback. Slide 28. Looking at the longer terms of this full year result on the slide, total revenue was up 41.4% when compared to 2019. We also saw gross profit expanded by 42.5% and adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based compensation, was up 36.2%. from pre-pandemic period. Adjusted EPS increased 29.1% when compared to 2019. Now I will turn back to Talia.

Thank you, Nir. Turning now to an important slide of ours regarding our KPIs for the year. We grew our physical presence by over 17% in 2022 to 58.3 thousand square meters. Since the end of 2018, we've grown net square meters by over 60%. And at the same time, we've grown sales per square meter as well, up 15% since the end of 2018. This is an incredible figure when it is taken into account together. So we have... not seen any decline in our sales per square meter despite such an increase in our physical presence. Following strong expansion in each of the years 2019, 2020, and 2021, same-store sales contracted modestly this year when compared to the pandemic-aided period in 2021. And you spoke about it as well. And lastly, average basket size across our own stores has continued to expand. And we captured significant gains through the pandemic and were able to held onto it and build onto that momentum since. Lastly, on slide number 30, turning to our outline of our updated financial targets in the short to medium term. We expect our store opening cadence to remain the same, three to five max stores per year. We believe that this expansion, along with expected annual comp sales growth of 3%, will lead to annual revenue growth of low to mid-teens. That is still the same target that we had previously. That is including the benefit of potential growth engines, additional growth engines, whether it's Portugal or other growth engines that we are evaluating. We believe that this stop-line expansion will lead to pre-IFRS 16 adjusted EBITDA of approximately 13% in terms of margins, with potential to expand margins by an additional 100 basis points in the longer term. Adjusted EPS growth is expected to grow at a similar pace to revenue. So before slide 31, before we move into the Q&A session, I wanted to thank the entire Maxtalk team for another excellent year. As we move into 2023, we remain very confident in the underlying strength of our business and our strategy. The year is off to a good start, with same-store trending modestly above our growth rate in the second half of 2022. We are well positioned to continue to reach new customers and grow our presence as lingering inflationary pressures lead consumers to increasingly look for extreme value in the marketplace. Along with our strategy and our value proposition, our team continue to prove themselves adept and resilient, and that gives me confidence in the continued success of Maxtalk in the years ahead. Thank you, and we are now ready to take any questions. So one moment. Can you provide an update on the health of the Israeli consumer? Are you seeing increased trade-downs or any other notable changes in shopping behavior? Well, just a few – first, a few points on the macroeconomics. Inflation is slightly – is trending slightly over 5 percent. Bank of Israel rates is at 4.25. I must say that in our stores, we feel that the consumer is continuing to come even more often. We did decrease prices, so that has some potential to impact basket size, but we have not seen any material changes.

And it makes more people come to the stores.

Exactly. And we do see traffic going up in our stores. Overall, obviously, the Israeli consumers is impacted, but as Nir mentioned, we believe and so far are seeing that this is actually in our favor. And another question, what are the puts and takes to gross margins and SG&A this year? So gross margins, you know, we've said that in the past quarters, you know, a few levers that are there to support our gross margin expansion. The most important one is shipping costs that significantly went down. and have much more significant impact on our gross margin than any other factor, exactly. In terms of additional elements, we had the reform regarding customs, which is still in effect, and that also gives a certain, you know, some benefits. Um, the other elements I think is that the shipping costs also translates the lower or declining shipping costs also translates into, um, better or broader flexibility for us in terms of our merchandise selection. And that is actually, uh, helping us to expand basket size because if we last year, uh, refrained from, uh, products that had high volume and that typically would also have higher prices, we don't need to have any constraints or similar constraints this year. We also, if you saw in the first slide, increased our percentage of directly imported products to 60% versus 50% last year, that is also a contributor to higher gross margins. On SG&A, the main element is inflation.

And stock-based compensation.

Yes. So first, inflation that has an impact on rent, that is indexed to inflation, and then potentially also labor that is not linked, but we did see some increase.

Mainly in the first quarter of the year. The other three quarters, we were able to manage it much better, and the position now in Israel regarding the workers is much better than in the beginning of last year.

And as Nero mentioned, stock-based compensation is a main element in terms of gap EBIT. We've neutralized it in our adjusted EBITDA and adjusted EPS. But for those of you who are focused on gap figures, we no longer have any material expenses in terms of stock-based compensation. And that's like 3 to 4 million shekels per quarter. that has no tax shield and that is not going to the minority. So it actually goes one-to-one to net income to the shareholders of the company. Exactly. And I think we have a few more questions under the chat. So let me see. No, that's it. Okay. Okay. Great. So thank you very much, everyone, for joining us. Please be in touch in case you have any further questions. We are more than happy to help you with any modeling questions or anything you have in mind. And hope to see you again on our next quarterly call. Thank you.

Thank you.